By ANDREA JAMES, P-I REPORTER

Published 10:00 pm, Tuesday, July 1, 2008

As Internet retailing becomes more important for companies, the dynamic of how business is done is changing, according to two recent research reports.

Nationwide, shoppers are increasingly turning to the Internet and hunting for free-shipping deals to save time and avoid burning gas. And even those who do shop in stores are increasingly doing their research online.

Internet sales are expected to keep growing in the double digits, even as brick-and-mortar stores suffer. That means that companies like Amazon.com are remaining king, and others, such as Nordstrom, are expanding their online presence.

Online sales rose 19 percent and topped $136 billion in 2007, according to U.S. Census Bureau data cited in the Moody's report. In 1999, online sales were a fraction of that, at $4.6 billion.

As a result of the growth, Moody's will start taking Internet sales into account with its credit analysis, the report said.

"A strong online presence is considered a ratings positive more frequently than in the past, because it represents such an important channel of distribution and can mitigate declining comparable store sales trends," the report said.

In response to the trend, traditional retailers are ensuring that they have got the goods online as consumers naturally shift toward Internet shopping, said Maggie Taylor, vice president and senior credit officer at Moody's Global Corporate Finance.

"Most brick-and-mortar companies still predominantly remain brick and mortar, but online is becoming a bigger piece of their business," Taylor said. "Some of it is just the market growth; the consumers are gearing themselves more toward that."

Online retail isn't big enough to offset all the problems faced by retailers, but online is mitigating part of falling in-store sales, Taylor said.

Internet retail is not a new concept, but for the first time, "the dollars finally are getting to the point where they reach critical scale," Taylor said.

Mark Mahaney, a U.S. Internet industry analyst with Citigroup Global Markets, issued a report in mid-June on his findings at the recent Internet Retailer Conference in Chicago, which had 5,000 attendees.

"While offline retail continues to slow down, online retail is recognized as the growth driver for many of the retailers, vendors and manufacturers we spoke with," Mahaney wrote.

And in terms of online retail, Amazon.com is setting the standard. It's the world's largest online retailer, and 2.6 times the size of the next largest, Staples, according to the Internet Retailer Top 500 Guide, which was cited in the Citi report.

"Amazon continues to maintain its material lead versus other online retailers both in scale and in innovation," Mahaney wrote.

Both research reports noted that traditional retailers are investing more in online.

Seattle-based Nordstrom Inc. is an example. The national economic slowdown has cut into Nordstrom's profit. In its most recent quarterly report, the company's profit was $119 million, compared with $157 million for the same period a year ago.

But Nordstrom has said that it would combat the economic climate by focusing on what it can control, including enhancing its online service with at least two new features.

First, Nordstrom has extended its "buy online, pick up in store" option to all of its departments.

Second, Nordstrom.com is using video to entice fashion-conscious shoppers. The Seattle clothing company calls them "Designed to Inspire" videos.

In the videos, designer Michelle Smith talks about her favorite pieces in the Milly Fall 2008 collection.

Shoppers can click on an article of clothing and watch the designer talk about how to wear the piece. The designer clothes are priced between $245 and $850.

Despite online's promises, the Moody's report issued a warning to investors and online retailers: More focus on online means more potential for things to go wrong.

When Victoria's Secret's distribution center faced problems in the second half of 2007, Limited Brands had to scale back its online lingerie holiday sales to avoid mass delivery problems, according to the Moody's report.

And when Amazon.com's Web site crashed in June, the Seattle P-I calculated that the outage could cost the company $29,000 per minute, based on its $14.8 billion 2007 net revenue.

"With higher sales momentum and greater transparency of Internet sales come scrutiny and potential strategic misfires," the Moody's report said. "Even in the best of times, retailing strategy is a series of delicate balancing acts. Online retailing can create one more opportunity for a costly blunder."